Introductory Econometrics - 2017

B.A. (H.) Economics— CBCS Part – II

Sem - IV
Duration : 3 Hours Maximum Marks : 75
Instructions:
The question paper consists of seven questions. Attempt any five questions.
Each question carries 15 marks.
1. State whether the following statements are true or false. Give reasons for your
answer:
2 2
(a) The adjusted R is always less than the unadjusted R .
(b) The OLS estimators are best linear unbiased estimators (BLUE) in the
presence of heteroscedasticity.
(c) All points of the sample cannot lie above the estimated least squares
sample regression line:

Yˆi  b1  b2 X i

(d) A regression model with a high R 2 may not be judged to the good if one or
more coefficients have the wrong sign.

(e) The smaller the p  value, the more contradictory is the data to H 0 .

(5x3=15)
2. (a) Consider the regression model :

Yi  B1  B2 X 2 i  B3 X3i  ui

In order to check for presence of multicollinearity, the auxiliary regression

is run and the results are as follows:

X2l  2.456  0.7952 X3i

se   0.56 1.598 R 22  0.90.

(i) Compute variance inflation factor  VIF . Do you find evidence of

multicollinearity ?
(ii) Would multicollinearity necessarily result in high standard errors of
the OLS estimators in the above model? (5)
(b) Let the population regression function be:

Yi  B1  B2 Xi  ui

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 The function is estimated using OLS and the residuals, ei , are found to be
heteroscedastic. Transform the above model by applying the weighted least
squares (WLS) method to obtain homoscedastic error under each of the
following cases. Do the transform regression in each case have an
intercept term :

(i) ui   i Xi where i ~ N  0,  2 

(ii) E  ui2    2 Xi .

(c) The owner of shopping mall is considering the possibility of redesigning the
parking facility. He first wants to check the claim that, on average, cars
remain in the parking area for 42.5 minutes. For this a random sample of
64 cars was investigated and it was decided that the claim would be
accepted if the sample mean falls between 40.5 to 44.5 minutes. Assuming
  7.6 minutes, calculate the probability of rejecting the null hypothesis
when the null hypothesis is false because the true population mean is
38.5.

3. (a) Data on monthly income  X, in Rs. '000  and monthly food expenditure
( Y,in Rs.'000) of seven households yielded the following information:

x i yi  211.7143, x 2
i  801.4286, y2
i  60.8571,

Y  9.143, X  30.286
where

yi  Yi  Y, xi  Xi  X

(i) Obtain the estimated regression line of monthly food expenditure on

monthly income.
(ii) Calculate the standard error of regression.
(iii) What proportion of the total variation in food expenditure of
households can attributed to the linear relationship between food
expenditure and income?
(b) (i) Discuss any two reasons for the presence of autocorrelation.
(ii) If  is known to be 0.8, discuss how the problem of autocorrelation
can be remedied using Generalized Least Squares  GLS for the
following two-variable regression model,

Yt  B1  B2 Xt  ut

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 where the disturbance term, ut , follows AR 1 scheme, that is,

ut   u t 1 vt . (5)

(c) If the regression model

Yi  B1  B2 X2i  B3 X3i  ui
is estimated using the method of least squares, prove that the OLS
residuals. ei would be uncorrelated with the estimated Y values.

4. (a) Are the OLS estimators BLUE in the presence of high multicollinearity
among the regressors? What are the practical consequences of estimating
a regression model in the presence of multicollinearity ?
(b) A three variable regression model gave the following results:
Source of Degrees of Mean Sum of
Sum of Squares
Variation Freedom Squares
Due to
32621 ___ ___
Regression
___
Due to Residuals ___ ___
39472
Total 33

(i) Complete the table.

(ii) Test the model for overall goodness of fit at 5% level of significance.

(iii) Calculate the value of R 2 for the model. (5)

(c) The regression results from the model,

Yi  B1  B2 Xi  ui

are obtained for a cross-section of 30 households, where Y is

consumption expenditures (in Rs. thousands) and X is income (in Rs.
thousands). In order to check for the presence of heteroscedasticity, the
observations are arranged in the increasing order of the magnitude of X.
The regression is run separately for first 11 (Group I) and last 11
observations (Group 2). The regression results for these two subgroups
are reported as follows (standard errors are reported in the parentheses) ;
ˆ  1.0533  0.876 X
Group 1 : Yi i

(se)   0.616   0.038 R 2  0.9851 RSS1  0.475  105

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 ˆ  3.279  0.835 X
Group 2 : Yi i

(se)   3.443  0.096  R 2  0.9585 RSS2  3.154  105

(i) Perform Goldfield-Quandt test at 5% level of significance. State the

null and alternate hypotheses clearly. Do you find evidence of
heteroscedasticity?
(ii) List the underlying assumption related to the distribution term made
in the above test. (5)
5. (a) The following regression model was estimated using annual time-series
data for the period 1990-2012 for a certain country:

ln Yt  b1  b2 ln X2t  b3 ln X3t

where Yt  demand for cheese (in kg.)

X 2 = disposable income (in Rs. ’000 )

X 3  price of cheese (in Rs. per kg.)

The results are summarized in the following table:
Coefficient Standard error
Intercept 2.03 0.116
X2 0.45 0.025
X3  0.377 0.063

(i) Interpret the partial slope coefficient.

(ii) If the calculated F statistic for the estimated model is 492.513, what
is its R 2 ? (5)

(b) A researcher estimated the demand function for money for an economy for
100 quarter using quarterly data for the period Q1:1985  1986 to
Q 2:2010  2011. The regression results are as follows (standard errors are
mentioned in the brackets and in indicates natural log):

ln Mt  2.6027  0.4024 ln Rt  0.59 ln Yt

(se)  1.24   0.36 (0.34)
R 2  0.92 Durbin-Watson d  statistic  1.755

where M t  real cash balances

Rt  long-term interest rate

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 Yt  aggregate real national income

Use Durbin-Watson d test to check for the presence of first order

autocorrelation at 5% level of significance.
(c) For the log-inverse and lin-log functional forms given below, find the slope
and elasticity of Y with respect to X :

(i) ln  Y   B1  B2 1/ X 

(ii) Y  B1  B2 ln  X  . (5)

6. (a) The management of a cookie manufacturing company does not want the
variance of the net weight of these cookies in a pack to be more than 0.015
square grams. If the variance is not within this limit, the machine used for
packaging is stopped and adjusted. A recently taken random sample of 25
package from the production line gave a variance of 0.029 square grams.
Based on this information, do you think the machine needs an
adjustment? Use a 5% level of significance. State the underlying
assumption, if any.
(b) (i) In the regression model

Yi  A1  A2 X2i  A3 X3i  ui

suppose

Y3i  10  3 X 2i

Show that we cannot uniquely estimate the original parameters

A1 , A 2 and A 3 .

(ii) Discuss any two remedial measures to eliminate the problem of

multicollinearity.
(c) The following regression output relates to the advertisement expenditure
X  and sales Y  of a firm manufacturing garments using cross-sectional
data collected in a particular year from 14 stores that the Company owns:

Yi   1.2088  2.0742 X i

se   0.9949  0.2536
(i) Conduct a two-tailed test for the statistical significance of the slope
coefficient at 1% level of significance.
(ii) Apply the F test to test the preceeding hypothesis.
7. (a) Consider the following regression model:

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 Y  B0  B1 ln  X1   B2 ln  X2   B3 ln  X3   B4 ln  X4   u

where
Y = per capita consumption of potatoes in kg.
X1 = per capita income in Rs. ’000.

X 2  price of potatoes in Rs. per kg.

X 3  price of cauliflower in Rs. per kg.

X 4  price of cabbage in Rs. per kg.

(i) How will you test the joint hypothesis that potato consumption is not
affected by the prices of cabbage and cauliflower? Explain the steps
involved in the test with reference to the above model.

(ii) If the estimated value of b1 is 200, it means “a 1% increase in income

is associated with a 200% increase in per capita consumption of
potatoes, everything else kept contant.” Is the above interpretation
correct? Explain. (5)
(b) For the regression model

Yi  B1  B2 Xi  ui ,
the fitted regression equation is

Yi  b1  b2 X i .

In each of the cases below, find the new fitted regression equation, Yi and
express it in terms of Yi .

(i) if we add a constant  to each X value.

(ii) if we add a constant  to each Y value. (5)

(c) The following model of consumption is estimated for an economy for the
years 1947-2000 :

ln Ct  B1  B2 ln PDIt  B3 INTt  ut

where C  real consumption expenditures in billions of dollars

PDI  real disposable personal income in billions of dollars
INT = real interest rate
and ln indicates natural log.

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 The OLS residuals  et  are then regressed on ln PDI, INT and et 1 as
follows:

et  A1  A2 ln PDIt  A3 INTt  A4 et 1  vt

The above regression is reported to have R 2 = 0.0983. Perform Breusch-

Godfrey test to check for the presence of autocorrelation at 5% level of
significance. (5)
**********

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